europe

Kiev residents fear higher prices from bailouts

March 6, 2014: 9:38 AM ET

On the ground in Kiev, Ukrainians wait in uneasy limbo as European leaders discuss rescue packages.

By Vivienne Walt

People wait in line for food distribution at Independence Square in Kiev on March 5, 2014.

People wait in line for food distribution at Independence Square in Kiev on March 5, 2014.

FORTUNE -- As Western officials try to salvage Ukraine's near-bankrupt economy they might want to visit the country's Ministry of Agrarian and Food Policy to take stock of how difficult their task might be.

Inside the Soviet-era building off Kiev's Independence Square on Wednesday night, the lobby was piled high with grimy mattresses, shoes, and clothes stuffed into garbage bags. They belong to protesters who have set up camp inside Kiev's government buildings for months, sheltering through a freezing winter of violent battle on the square. The uprising drove Ukraine's president Viktor Yanukovych into exile two weeks ago, and brought Russian tanks and troops rolling over the border into the Crimean peninsula, about 400 miles South of the capital, on the Black Sea.

Now, Kiev feels like a city in uneasy limbo. Like the agrarian-policy ministry, much of its government is barely functioning. For many of the city's 2.7 million residents, there is little evidence that their country could descend into catastrophic warfare at any moment. Hundreds of protesters still huddle through the night in tents erected months ago on the square, known as the Maidan in Ukraine. Barricades of tires, scrap wood, and metal still block the area, and thousands of bouquets of carnations and candles line the square, in commemoration of the dozens of protesters shot dead by government snipers, during Yanukovych's last-ditch attempt to crush the uprising last month.

MORE: Ukraine crisis: Why China is keeping mum

But rather than panic about a Russian military invasion, for most people, the more urgent concern is how to make ends meet -- reflecting the perilous state of Ukraine's economy. "I'm a doctor, with a Ph.D. and an M.D., and I earn 1,500 hryvnia [about $150] a month," Lidiya Butskaya said on Wednesday night, sitting in a makeshift clinic inside the state-run radio and television building near Independence Square, which treats wounded and sick protesters; Butskaya's volunteer doctors have set up two surgical operating tables in an administrative office.

Like most doctors here, Butskaya juggles various jobs, boosting her income with hours at private facilities and classes for medical students. But she says one intense fear is that Ukrainians might be forced to pay more for their household gas, as part of the rescue packages their interim leaders are negotiating, with the U.S., EU, and the IMF.

For years, IMF officials have demanded from a succession of Ukrainian leaders that they cut the heavy subsidies on gas, which cost the government billions of dollars a year. The IMF froze two previous arrangements, in 2008 and 2010, after Ukraine refused to implement the deeply unpopular austerity measures. To Ukrainians, higher prices for utilities -- in a country with months of sub-zero temperatures -- seem unthinkable. "Of course we cannot afford it," Butskaya says.

MORE: Why foreign CEOs should care about Ukraine

On Thursday in Brussels, the EU is set to confirm a package of loans and grants to Ukraine, amounting to about 11 billion euros (about $15.1 billion) over the next few years, according to European Commission President Jose Manuel Barroso. That is in addition to $1 billion in loans from the U.S., announced on Tuesday. Most of the new EU money -- about 8 billion euros -- will be in the form of credit from financial institutions, however, further increasing Ukraine's debt.

Nonetheless, the EU package is far more than what Europe offered Ukraine last year as part of an "association agreement." Ukraine's ousted president refused to sign the deal, instead accepting a $15-billion aid package from Vladimir Putin -- the exact sum the EU is now offering. Yanukovych's decision to opt for Russian patronage rather than closer ties to Europe proved fatal for his rule, bringing hundreds of thousands of people pouring into Independence Square, and sending the president fleeing for his life.

With Ukraine now in a tug of war between the West and Russia, the billions in grants and loans are the surest way to win over Kiev. But that, say analysts, is a measure of how corrupt Ukrainian leaders have mismanaged the country for two decades. "The effectiveness of economic coercion is no credit to Russia's strength," wrote the International Institute of Strategic Studies' regional analyst Samuel Charap in a blog post this week. "Rather, it is a reflection of the utter failure of the Ukrainian elite to reform the country's economy."

MORE: Russia's laughable economic threats against the U.S.

Those old habits are not certain to end, despite closer Western economic ties. Elections are scheduled for May to choose Yanukovych's successor.

In the makeshift clinic near Kiev's Independence Square, the doctors say they have seen previous leaders since Ukraine won its independence from Russia in 1991, who have grown immensely wealthy in office, and are skeptical that the next lot will be drastically different. "All our previous government were useless," Butskaya says. Standing next to her, the center's management advisor Vsevolod Kashlyuk nods in agreement. "We have a joke in Ukraine," he says. "In order to make your second million, you have to steal your first one."

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